Hey guys, it's Sasha Citadel made a record profit of 16 billion dollars in 2022 according to estimates by Lch. Investments a fund that invests in hedge funds. And in case you're wondering, 16 billion dollars is a lot of money according to this data, Citadel made 2.4 times as much money as the next 19 biggest hedge funds combined. those are the hedge funds include Ray Dalio's Bridgewater and thesaurus fund and the 16 billion dollars profit has beaten the previous record for a hedge fund when John Paulson made 15 billion dollars by betting against the U.S housing Market back in 2007, which was described as the greatest trade ever John Paulson by the way, made 25 times as much money in the financial crash as Michael Berry did betting on the same thing, but nobody made a movie about him so he hasn't attained Godlike stages on Twitter predicting all 69 of the last three stock market crashes.

So Citadel managed to make a giant heap of money in 2022 when the S P 500 lost 19.4 percent and NASDAQ finished 32.4 percent down. And the obvious question is how the did they do it did Ken Griffin The Citadel CEO perfectly timed the market and did he have the unique, amazing foresight that nobody else had to make those perfect trades to understand what? Citadel Did you need to understand what Citadel is Because Citadel is no ordinary hedge fund. No. Citadel has two parts to their business.

The first is called Citadel Securities and this is No. Securities is a market maker. They are the company that executes trades and provides liquidity To the stock market. They are the largest designated Market maker on the New York Stock Exchange responsible for over 2 000 Securities listed there, and they have 40 percent of all U.S retail trading volume When you add the 1600 institutional investors that also use Citadel one in four of all U.S Equity trades run through Citadel Citizen operates globally in over 35 countries around the world and process this is over 20 percent of the global Equity trade volume.

So on the one hand, you have this company called Citadel Securities that processes trades on the stock market, and on the other hand, you have a completely separate company that has absolutely nothing to do with Citadel Securities called Citadel LLC Citadel Advisors. Being part of that, it would be legally dubious for a hedge fund to know exactly what trades everyone else in the market is making in real time before those trades go in. So of course, these two companies are completely separate and share absolutely nothing in common whatsoever except they are both owned by Ken Griffin And except for the fact that they say I have the same name and except for the fact that both of them uh were based in the same building in Chicago called The Citadel Center and both are in the process of moving to the Southeast Financial Center building in Miami. But apart from that, they are completely separate and have nothing to do with each other whatsoever.

Reports gathered by the SEC indicate that Citadel Security spent 2.6 billion dollars on payment for order for in 2020 2021. Payment for order flow is money that companies like Citadel paid to Brokers and transaction processors to root the execution of Trades through them. So when somebody goes and buys stock on a Robin Hood or some other Brokerage in the United States Citadel pays Robin Hood money so that they can execute the trade instead of Robert and using some other route at the same time. The Us and other countries have laws that say that every transaction has to be done at the best execution price and this means that the broker Robin Hood or whoever can't go and send your order to Citadel If the price that Citadel is offering on the security and the cost of execution and the speed of the execution is worse than the national best bid and offer and Citadel Securities pays to process these transactions because they have tools and systems that can process the thousands upon thousands of transactions every second and they can make money on the natural spread between the buy and sell price of any good inequity or the difference in the spread between what they're seeing in the market and what the best offer available to Brokers is the only reason payment for order flow exists and is not illegal.

The only reason that is given is because these companies provide liquidity. Imagine you want to go and become a market maker and you go and get a hundred shares of a company. X The shares have a 100 price for anyone who wants to sell and 101 price for anyone who wants to buy. So someone comes and sells you a share for a hundred dollars.

Then someone comes and buys that share off you for a hundred and one dollars. You've just made one dollar in an extremely oversimplified way. That is the idea behind how it all works. And so you go to Robinhood and you say I will pay you 10 cents a share to send me all of your orders because you know that you'll be making 50 cents per share when you execute those trades on average.

Of course, there is a whole lot more to it. This is massively oversimplified because the natural share prices do fluctuate. The margins are extremely small, and when you execute billions of dollars of volume, those small fractions of a percent on those margins do eventually add up. Specifically, they added up to seven and a half billion dollars for Citadel Securities last year up 7.1 percent on the previous year.

Not too shabby. Now, knowing the exact trades that are coming through the market before those trades even execute is a big Advantage. If you control a significant chunk, say 40 percent of the total retail trading volume, you will know a heck of a lot more than anyone else about what the market is doing, where it is headed. You know the details of each individual transaction, You know which transactions are being matched in the open market or which ones are being put against liquidity pools.

which is exactly why high frequency trading companies and funds are not allowed to have access to this information. So of course, a hedge fund with the same name, same ownership and Sat in literally the same office will not benefit in any way whatsoever from the payment for order flow to Citadel Securities at the end of 2018 Citadel Security is the market maker. Company had 35 billion dollars of assets on the balance sheet remember the company that just executes trades at 35 billion dollars of assets and they also had 33 billion dollars of liability for the majority of their abilities. Sat under the security sold not yet purchased at Fair Value line and you might wonder what this means.

Well imagine you go and start a market making business. You put in a hundred dollars of your own money and you buy one share of a company to keep as your liquidity pool and then someone comes along and says hey, I want to buy a share of that company for a hundred and one dollars and you say sure, give me your money, they give you the money, You tell them it's a dumb deal, you shake hands, but you need a bit of time to send them the actual share because you know paperwork. You have to go and fill in some forms and all that stuff. Then you use the hundred dollars off the hundred and one dollars that you just received to go and buy another share of that business.

And now your balance sheet says that you have two hundred dollars of assets as Securities owned at fair value. You have one dollar of cash and you have a hundred dollars in security sold not yet purchased. Then another retail investor comes along wanting to buy another share. You do the same thing.

you take their money and you say hey, I'm gonna send it to you, don't you worry about that off and your balance sheet goes up to 302 dollars in assets against 200 in liabilities And you could keep on going like this until your balance sheet has 35 billion dollars in assets against 33 billion dollars in liability where almost all of their liabilities are shares that you have sold and received money for but haven't actually bought yet. And then just three years later at the end of 2021, those numbers balloon to 79 billion dollars in assets and 75 billion dollars in liabilities and the ratio gets a lot worse. 65.7 billion of those liabilities at the end of 2021 were Securities that were sold but not bought yet and another four and a half billion dollars of Securities that were sold and needed to be repurchased in the future because of contracts. And hey, these numbers sound pretty big tens of billions of dollars, but they are relatively small numbers when you compare them to the hundreds of millions of dollars that are being traded every day.

And I have seen people on Twitter and Reddit get very excited by these numbers. They pointed to 65 billion dollars in sold stocks that haven't been repurchased and say Citadel Securities is short in the market by selling stocks and then waiting to rebuy them at a lower price. And the sinigan. you might think that this is what they are doing.

The technical explanation is that these balances are commensurate with the daily trading volumes that Citadel processes across all kinds of equities. So these balances are not in any way abnormal. they're just noise because they are taken as a snapshot on December 31st and this, of course sounds extremely plausible and makes it look like nothing untoward is happening there. Of course, you could make the argument that theoretically some other nefarious Market maker could decide to actually effectively run a short position on the market by building up a balance of salt stock that they have not bought and they would make it look Legit by making its size sit somewhere in the right ballpark for what they would have to settle typically in the space of a few days, and then you could actually make a load of money by buying that stock at a lower price later on like maybe this year, for example, something that of course would be totally illegal.

So don't make the mistake of thinking that this is the sort of thing that someone at Citadel could possibly engage in. And of course, it is a complete utter coincidence that the only big hedge fund that happens to share an office and a company name with a market maker just happens to be the one hedge fund that goes and makes 16 billion dollars in the one year in the last decade when the stock market has a massive drop. Because remember the reason that Citadel security these are 70 odd billion dollars of Securities that have been sold but not yet purchased is not because this enables Citadel the hedge fund to front-run trades and make a very unusual amount of profit. In a year where every other hedge fund struggled.

No, that would be illegal. Although it would make of course a lot of money because you might take one look at the Citadel Holdings as of Q3 last year and see that they play hedged bets Well, they are a hedge fund. Here is a 48 billion dollar put on Sby, the S P 500 and the next biggest position is a call on spy. Then there's this call on QQQ NASDAQ and then there's a put on NASDAQ and so on and so on.

So you can see that like a true hedge fund, Citadel makes money from small movements in price in the underlying security. They do not give a what the long-term outcome is for any Equity They don't try to Value businesses. that's not what they do, they just make short-term bets on where the price will move. And somehow, somehow in a year when there was an abnormal amount of volatility in the market and the market dropped in value, if they happened to make two and a half times more money than the rest of the 20 biggest hedge funds put together by not using the data from the market maker to know exactly which way the prices were going during periods of high volatility.

No, they were just really good at maths and numbers and and kept making the right bet over and over and over and over to make a record-breaking profit without taking any particularly amazing, outstanding, unusual, specific position. Payment for order flow is a practice that stinks so bad that anyone who ever looked at it would have asked the question why the is it even allowed? Payment for order flow is banned in countries like Canada in the UK because it is a system that improves nothing other than the bank balance of the companies that are allowed to do it. The arguments for why payment for order flow is a good thing for investors are a decaying pile of excrement, and the SEC doesn't seem to think that it is at all odd in any way. Strange that Citadel prints magic money and has a hedge fund and a market maker sharing in office.

I Guess this has absolutely nothing at all to do with an abysmal level of corruption and a disgusting proliferation of money buying influence among the political class. If you found this this video useful, please don't forget to smash the like button for the YouTube algorithm. Thank you so much for watching I Really appreciate it and as always I'll see you guys later.